Figure out what millennials want - even if they can't afford it - and then give it to them. That's often how this market works and today the millennial caterers just went nuts with their love for millennial-related stocks.
It all started with the biggest deal in ages, Square (SQ) buying some Australian fintech, Afterpay (AFTPF) , a buy now pay later company for $29 billion this weekend. Square, which owns many a register and has captured the hearts of millennials and gen-exers with its Square Cash App, a wildly popular payment services.
The reasoning was pristine: "Buy-now-pay-later is a rapidly growing opportunity" with a number of growth drivers:
1. Merchants sifting towards omnichannel and using BNPL to help increase conversion, basket sizes and customer acquisition.
2. Emerging global Buy Now Pay later trend that Square doesn't have.
3. And what I would argue is most important: "consumer preferences shifting away from traditional credit as millennials and Gen Z consumers with growing spending power prefer more inclusive, flexible and transparent ways to pay and manage their finances."
Square believes that of the 10 trillion in on-line payments, only 2% is buy now pay later. That's a lot of room to run.
And that's why, after announcing this agreement, the stock, after falling $12, a typical reaction to an all stock-deal, ended up rallying the equivalent for $40 to arrive at $277 a share.
Before we unpack this analysis let me explain how rare it is to see a company's stock rally on an all stock bid. After all, the arbitrage pressure alone - selling Square and buying Afterpay, should have banged down Square's stock. The initial pressure came from exactly that. I was watching the miraculous rally as it was unfolding as one after another research firm said great things about the deal. Barclays says, "Bold Move into BNPL alongside Q2 stunner," in reference to the fact that the company also reported numbers early and they were quite impressive. Moffett Nathanson said, "Square + Afterpay: Advancing Toward the Holy Grail" which links the merchant better with the customer. But the clincher: JMP saying, "No Premium Looks Too High for BNPL " because it strengthens the "consumer and merchant" ecosystem.
Or, if I can sum it all up, this is a competitive move, one that's entirely necessary because Square with this terrific quarter under its belt and a credible buy now pay later mega-footprint, can compete with the two competitors out there: the pureplay Affirm (AFRM) and the true Square competitor, PayPal (PYPL) .
I immediately asked the redoubtable CFO, and deal spokesperson, Amrita Ahuja, why not just buy Affirm, a pure buy now pay later play. She shot back that Afterpay has higher growth with no interest payments, just a late fee, a global footprint with half of its business outside the U.S. and a growth accretive basis. She followed that up with an interview on Squawk on the Street, basically repeating these advantages and the stock was off to the races when she explained it.
She, not Jack Dorsey, is the spokesperson for the company as was CFO Sarah Friar before her. It's a highly unusual relationships but Dorsey does not make himself available to the press.
To me this is all about Affirm and PayPal and one other buy now pay later firm. Klarna, a Swedish outfit with 90 million customers, 75 million more people than Afterpay. They are all chasing the same people, the millennials.
In fact, Klarna, PayPal, Square, and Affirm are the big four in this space and they are all loved by institutional investors who don't have enough ways to invest in the biggest cohort of people out there, the under 30 crowd. When Klarna comes public I am sure it will be worth well more than Afterpay because of that huge number of customers.
Now here's what is so strange. These companies are all unregulated, they can pretty much do what they want and they tend to cater to a less wealthy investor. In that sense they are the exact opposite of the people the major banks seek. The big banks, of course, are depository institutions. The PayPals and the Squares don't have deposits, which give them freedom to pursue the less well-off. It's a gut check for a Wells Fargo (WFC) or Bank of America (BAC) or Citi (C) and JP Morgan (JPM) .
Who else fits the pattern of an investment in younger investors? We know they like cord cutting - cable is too expensive. That means Roku (ROKU) , the default TV company. It means DoorDash (DASH) , which his in synch with what younger people do when they want to eat dinner. It's Chipotle (CMG) , the way Wall Street thinks young people eat when they do go out.
Finally, there's Robinhood (HOOD) . I know that the offering can be considered a bust, in the sense that it didn't hold the print price, meaning it couldn't stay above where it was being offered to the public. I know that many wrote the company off not just at the offering but also during the GameStop (GME) fiasco. I think those people do not understand that younger people love Robinhood. Even at the height of where Wall Street was laughing and Vlad Tenev and the company's capital problems, the sign-ups never stopped. Believe me, had it gotten in real trouble any of the major firms would have reached out. They know the truth: you can't get at these people the way traditional marketers work, because many of the customers of these companies simply hate anything traditional in the financial space. They don't trust banks and know that they aren't big enough to be taken seriously. They don't trust traditional credit cards because they equate them with exorbitant fees. They don't trust traditional brokerage houses because they think they are looked down upon.
Now understand, I do not think that this is all necessarily true, although the banks, after the horrendous Great Recession do sniff at subprime, which is really the bailiwick of buy now pay later. But I also get it. My wife who has a successful real estate career, got booted from the wealth division of a major firm simply because she hadn't saved up enough to qualify. It was mortifying.
But that's what these rebels know and fear. The traditional establishment is simply not interested in them and they despise anyone in the business. They loved the concept of Robinhood because the original Robin Hood, robbed from the rich to pay the poor. They are rebels along with Vlad and the more Vlad branches out to other forms finance, including buy now pay later cards, the more his 22 million person army will grow and get more powerful.
It's why I think that Robinhood can be bought. If Square's stock goes up huge on this deal, can you imagine if Robinhood bought Affirm? It would soar.
Now I know that some of these companies - Chipotle, Roku and DoorDash - are more tangential. But their stocks show you how scarcity value, the lack of young person theme investments, have powered them far further than we thought at a tremendous velocity to boot.
But what matters with Square is that it's got the ecosystem covered as does PayPal. Robinhood is next.
Now the only company that really comes close of the establishment names? That would be American Express (AXP) , which has a tremendous number of millennials signing up as part of an aspirational move. The only problem? This group doesn't have that kind of money. Buy now pay later suits these people fine especially if it is merged with a Robinhood to reach the unreachable and be successful - meaning a bigger market capitalization for doing so.